Cipla Rating: Buy- Approval for Lanreotide a positive event

Cipla on 18 Dec 2021 announced final USFDA approval of Lanreotide depot injection under 505b(2) pathway. We expect the product to be launched soon. The approval is a positive surprise and is not factored explicitly into our earnings estimates. In the US the Lanreotide depot is available under the brand name Somatuline and there are no generic approvals for the product. Somatuline is approved for the treatment of acromegaly (high production of growth hormone), gastroenteropancreatic neuroendocrine tumours (tumours in gastrointestinal tract). The product has relatively complex API.

Lanreotide API is a large peptide molecule and is an analogue of somatostatin. The formulation is relatively simpler (compared to other long acting injectables) as it does not involve polymers or long-acting additives. Cipla has developed the product along with its partners. Cipla’s product is not substitutable to the original product. However, given strong volume growth and lack of competition, this is likely to emerge as a meaningful opportunity for Cipla in the near- to medium-term.

As per IQVIA, Somatuline annual sales were at $867 mn (MAT Nov 2021). The volumes are recording mid-teen growth. The company reported that global sales were at $1.3 bn in 2020, growing in mid teens. Ipsen Pharma has introduced a new pre-filled syringe in 2019, and we think the variation in Cipla’s product is primarily related to the syringe. Currently we do not have the details to assess the differences and hence advantages/disadvantages of the formulation.

We expect additional competition in due course. However, the competitive intensity is likely to be lower than for most generics. CIPLA’s market share gain can be aided by the fact that the product is administered in clinics (not self-administered) and it is a growing market. Further, being an early-mover, CIPLA is likely to gain a healthy market share over the next 12 months. Assuming 30-50% price erosion and 10-20% market share, the annual sales for CIPLA can be ~$50-75 mn.
Assuming 60-65% gross margin (accounting for profit share/royalty with partners), we estimate net earnings contribution of $25-35 mn, which translates to EPS of `2.4-3.1. This is ~6-8% of our FY23F EPS estimate of Rs 39.7.

Valuation and rating
We maintain Buy rating and TP of Rs 1,051, which is based on SOTP methodology: (i) we value the base business at Rs 992, based on 25x FY23F EPS, and (ii) we value the gRevlimid opportunity at Rs 59/sh. The stock currently trades at 21.7x FY23F EPS of Rs 39.7. Besides Lanreotide, there can be potential upside to earnings estimates from gAdvair, gRevlimid and PLI incentives which are not factored into our estimates.